NOTES RECEIVABLE (Continuation)

Non-interest bearing note – Illustration 3

On January 1, 2019, an entity sold an equipment with a cost of P250,000 for P400,000. The buyer
paid P100,000 cash and a noninterest bearing note for P300,000 payable in equal annual installment
every December 31.

PV of 1 = 100,000 collectible at a future period

PV of ordinary annuity = payable in equal annual installment every December 31/ End.
PV of annuity due = payable in equal annual installment every Jan. 1/ Beg

Assuming the prevailing interest rate similar note is 10%. Present value of an ordinary annuity of 1 for
three periods at 10% is 2.4869 computed as = [ (1 - (1 + i ^-n ) ) / i ] where i = interest rate and n = number
of periods. =((1-(1.1)^-3)/10%)

Manually computing the Present Value of the note

= 100,000 / 1.1 = 90,909 2019
= (100,000 / 1.1) /1.1 or ( 100,000 / 1.1 ^ 2 ) = 82,644
= 100,000 / 1.1^3 = 75,131
= P248,684

Entry to record sale Face value of note 300,000

Cash 100,000 Present value of note (P100,000 x 2.4869) -248,690
Notes receivable 300,000 Unearned interest income 51,310
Equipment 250,000
Gain on sale of equipment 98,690 Present value of note 248,690
Unearned interest income 51,310 Down payment 100,000
Sale Price 348,690
Cost of Equipment -250,000
Gain on sale 98,690

Principal
Interest income Present Value
(Annual Collection
Date Annual Collection (PV x 10%) (Outstanding
less interest
less Principal)
income)
Jan. 1, 2019 248,690
Dec. 31, 2019 100,000 24,869 75,131 173,559
Dec. 31, 2020 100,000 17,356 82,644 90,915
Dec. 31, 2021 100,000 9,085 90,915 0
*Due to rounding off 51,310

2019 2020 2021

Cash 100,000 100,000 100,000
Notes receivable 100,000 100,000 100,000
Unearned interest income 24,869 17,356 9,085
Interest income 24,869 17,356 9,085
Non-interest bearing note – Illustration 4
On January 1, 2019, an entity sold an equipment costing P600,000 with accumulated depreciation of
P250,000. The entity received as consideration P100,000 cash and a P400,000 noninterest bearing note
due on January 1, 2022. Prevailing rate of interest for a note of this type is 10% ~ 0.7513 (1 + i )^-n

Observe that the note is collectible on a lump sum basis after 3 years.

Face value of note 400,000

Present value of note (P400,000 x 0.7513) -300,520
Unearned interest income 99,480

Present value of note 300,520

Down payment 100,000
Sale Price 400,520
Carrying amount of Equipment (600,000 - 250,000) -350,000
Gain on sale 50,520

Entry to record sale

Cash 100,000
Notes receivable 400,000
Accumulated Depreciation 250,000
Equipment 600,000
Gain on sale of equipment 50,520
Unearned interest income 99,480

2019 2020 2021

Unearned interest income 30,052 33,057 36,371
Interest income 30,052 33,057 36,371
Cash 400,000
Notes receivable 400,000

Present
Unearned interest Value
Interest income income (Previous
Date
(PV X 10%) (Balance last period less balance +
interest income) Interest
Income)
Jan. 1, 2019 99,480 300,520
Dec. 31, 2019 30,052 69,428 330,572
Dec. 31, 2020 33,057 36,371 363,629
Dec. 31, 2021 36,371* 0 400,000
*With difference of P8 due to rounding off
 LOANS RECEIVABLE

Loan Receivable – is a financial asset arising from a loan granted by a bank or other financial institution to
a borrower or client. For banks and other financial institutions, receivables primarily arise from loans to
customers. The term for he loans may be short or long-term but in most cases, the repayment periods
cover several years.

Initial Measurement Subsequent Measurement

Fair Value + directly attributable transaction costs Amortized cost using effective interest method

Note: Business model and contractual cash

Normally, transaction price or loan granted flow tests

Origination fees - fees charged by the bank against the borrower for the creation of the loan and includes
the following:
 compensation for activities such as evaluating the borrower’s financial condition
 preparing and processing documents and closing the loan transactions
 evaluating guarantees, collateral and other security
 negotiating the terms of the loan
 Closing and approving the loan transaction

Origination fees received from borrower are recognized as unearned interest income and
amortized over the term of the loan.

Direct origination fees origination fees not chargeable against the borrower, which is deferred and
amortized over the term of the loan.

Origination Fees Received > Direct Origination Fees = Unearned Interest Income / Increase interest income
Origination Fees Received < Direct Origination Fees = Direct Origination Cost / Decrease interest income

Illustration:
Global bank granted a 3-year loan to a borrower on January 1 2019. The interest on the loan is 12% payable
annually starting Dec. 31, 2019.

Principal amount 5,000,000

Origination fees received 331,800
Direct origination costs 100,000

Initial carrying amount of loan

Principal amount 5,000,000
Origination fees received -331,800
Direct origination costs 100,000
Initial carrying amount of loan 4,768,200
 Effective interest > Nominal/ Contract Rate = Discount

Loan receivable 5,000,000

Cash 5,000,000
To record loan

Cash 331,800
Unearned interest income 331,800
To record origination fees

Unearned interest income 100,000

Cash 100,000
To record origination costs

FV - PV 5,000,000 - 4,768,200
C + (5M x 12*) +
Effective t 3
= = = 13.87% or 14%
interest FV + PV 5,000,000 + 4,768,200
2 2

Interest received Interest Income Amortization Carrying Amount

DATE (Principal x Nominal (Carrying amount x (Interest income- (Previous balance -
Rate) Effective Rate) Earned) Amortization)
Jan. 1, 2019 4,768,200
Dec. 31, 2019 600,000 667,548 67,548 4,835,748
Dec. 31, 2020 600,000 677,005 77,005 4,912,753
Dec. 31, 2021 600,000 687,247 87,247 5,000,000

2019 2020 2021

Cash 600,000 600,000 600,000
Interest income 600,000 600,000 600,000
Unearned interest income 67,548 77,005 87,247
Interest income 67,548 77,005 87,247
Cash 5,000,000
Loan Receivable 5,000,000

BALANCE SHEET PRESENTATION

2019 2020 2021
Loan Receivable 5,000,000 5,000,000 5,000,000
Unearned interest income - 164,252 - 87,247 -
Carrying amount 4,835,748 4,912,753 5,000,000